US Advances Retaliatory Tax Measures: What Private Capital Professionals Need To Know

Earlier this month, we published a briefing summarising the 'retaliatory' tax measures in the 'One Big Beautiful Bill Act' Bill (the "Bill"), which target certain overseas taxpayers, including (as currently drafted) those in the UK, with direct and indirect investments and interests in the US.

In this bulletin, we consider the potential impact of these measures for fund managers and other professionals operating in the private capital industry.

Key messages

Although the Bill is still in draft and must be approved by both chambers of Congress, there is a real possibility that the retaliatory tax measures will, in some form, be implemented.
Investment Funds and Investors that are resident or sufficiently connected with a jurisdiction with an 'unfair foreign tax' may be significantly impacted if they have current investments (or make future investments) in US assets.
Many jurisdictions have an 'unfair foreign tax' for the purposes of the retaliatory tax provisions, including the UK, Luxembourg, most of the EU, Australia, Canada and Japan.
One of the key impacts of the new measures is the imposition of increased tax rates in respect of US source income/profits, including by way of withholding tax, purporting to override any applicable double tax treaty.
Risk allocation provisions in fund documentation should be considered in light of the potential increased tax exposure, and additional compliance obligations should be anticipated.
These measures may discourage foreign investment in US assets.

Background and progress of the Bill to date

The Bill's retaliatory tax measures aim to protect US economic interests by imposing additional tax burdens on persons connected to jurisdictions that have implemented taxes viewed by the US administration as adverse to US persons. The US retaliatory taxes aim to counter the negative impact of the relevant jurisdiction's taxes on US businesses and investors.

The Bill, including the relevant tax measures, was approved by the House of Representatives (by one vote) on 22 May 2025, and has now moved to the Senate for approval. The Senate Finance Committee published its own version of the Bill on 16 June 2025, including an amended form of the retaliatory tax measures. The two versions of these measures are similar, but also include material differences, and must be reconciled and agreed upon by both chambers before the President can sign the Bill into law. The fact that the tax measures have not been removed in their entirety from the Senate's version of the Bill indicates that their implementation is a significant step closer.

What retaliatory tax measures are included in the Bill?

The tax measures are comprised in a new section 899 ('Enforcement of Remedies Against Unfair Foreign Taxes') of the US Internal Revenue Code. If implemented, these measures would:

increase US federal income tax rates applicable to persons connected to a country that has implemented an "unfair foreign tax"; and
modify the application of the base erosion and anti-abuse tax ('BEAT') to non-publicly held corporations that are more than 50% owned by such persons.

A summary of these measures is set out below.

Measure 1 - Increased tax rates

Unfair foreign taxes

The Bill targets 'discriminatory foreign countries' (DFCs) (referred to as 'offending foreign countries' in the Senate version of the Bill, but referred to as DFCs for the purposes of this note) which are those countries that impose 'unfair foreign taxes', defined by the House version of the Bill as any:

Undertaxed Profits Rule (UTPR);
Digital Services Tax (DST);
Diverted Profits Tax (DPT); or
any "exterritorial", "discriminatory" or other tax as identified by the Secretary of Treasury that is disproportionately borne, directly or indirectly, by US persons.

The definition of 'unfair foreign taxes' in the Senate version of the Bill is materially similar (though the Senate version does not expressly refer to Diverted Profits Taxes). Both versions exclude any tax that does not apply to a US person (including a trade or business of a US person) or any foreign corporation (including a trade or business of such foreign corporation) if the foreign corporation is a controlled foreign corporation more than 50% owned (directly or indirectly, by vote or value) by US persons.

One significant difference between the two versions of the Bill is that the consequences of a person being connected to a DFC differ depending on which type of unfair tax has been implemented in the relevant jurisdiction. Under the House Bill, a person who is sufficiently connected to a DFC (see 'applicable persons' below) may be subject to increased taxes and the modified BEAT, regardless of the type of unfair foreign tax in existence in that country. Under the Senate Bill, a tax rate increase would apply only if the relevant DFC has an 'extraterritorial tax', such as the UTPR, whilst the modified BEAT rule would apply if the DFC has either an 'extraterritorial tax' or a 'discriminatory tax', such as a DST. The Senate, therefore, appears to be targeting rate increases at those jurisdictions that have implemented a UTPR.

DFCs include the UK, which currently has all three of the above identified taxes, and many other jurisdictions such as Australia, Canada, Japan and most EU countries.

Applicable persons

Increased tax rates may apply to 'applicable persons' ie non-US taxpayers 'connected' to a DFC. The definition of 'connection' is wide and includes individuals and companies tax resident in the DFC (or the shares of which are more than 50% owned (directly or indirectly) by tax residents of a DFC), governments of a DFC and government-owned entities, and also certain trusts, partnerships and other bodies created, organised or owned in or from a DFC.

Foreign partnerships (i.e., transparent for US tax purposes) that are not themselves US federal income taxpayers are commonly used by funds and investment structures. It appears from both the House and Senate versions of s899 that a partnership may be an 'applicable person' if identified as such by the Treasury Secretary, but this status would not apply automatically. While the partnership itself may not be an 'applicable person' the investors in the partnership who are themselves 'applicable persons', and not the partnership itself, may be subject to increased rates of tax on the portion of income allocable to them (see below).

Blocker corporations are also commonly used in private capital structures. A US blocker corporation would not be an 'applicable person' for the purposes of s899, but the corporation's investors may themselves be 'applicable persons' (for example, if they are resident in a DFC) and therefore may be subject to increased rates of tax under section 899, such as on dividends paid by the US blocker. A US blocker may also be subject to the modified BEAT rules if it is more than 50% owned by 'applicable persons' (see below).

Tax rates

The income affected by the increased tax rates is that derived from the US, including profits from a US trade or business carried on by a non-US resident, interest, dividends, royalties, rents and certain capital gains. It also overrides the statutory exemption for certain types of income derived by foreign governments or instrumentalities thereof.

Specified types of income that are currently exempt from tax under the US Internal Revenue Code, including by virtue of the portfolio interest exemption, are excluded from increased tax rates. The portfolio interest exemption applies to interest income received by non-US investors from US borrowers in respect of registered debt securities, with certain limitations: the exemption does not apply to interest paid to (i) a bank lending in the ordinary course, (ii) a 10% equity of the borrower (by vote, if the borrower is a corporation and by capital or profits if the borrower is a partnership); where the debt holder is a partnership, the 10% ownership test is applied at the partner level, and (iii) related CFCs. The portfolio interest exemption does not apply to dividends on shares.

Under section 899, rates of tax, including withholding, can be increased by 5% for every year the 'unfair foreign tax' is imposed. This increase is capped at 20% above the statutory rate in the House Bill (it is unclear how it applies to rates reduced or eliminated under treaty), and at 15% above the statutory rate or the rate that applies in lieu of the statutory rate (eg a treaty rate) in the Senate Bill. Accordingly, a US-source dividend paid to an 'applicable person' in the UK which is currently subject to zero withholding tax (under the US-UK treaty) could eventually be subject to withholding of 15% under the Senate Bill and possibly as high as 50% (ie 20% above the statutory 30% rate) under the House Bill (depending on how it is interpreted).

Measure 2 - Modification of the US BEAT rules

Section 899 would modify the BEAT regime for domestic corporations, other than publicly traded corporations, that are more than 50% owned (by vote or value), directly or indirectly, by an 'applicable person' (see above), as well as US branches of foreign corporations that are applicable persons. This could therefore include US and non-US corporations in foreign parented groups.

The BEAT regime is aimed at preventing the erosion of the US tax base by large multinationals making deductible payments to related foreign entities. The regime operates as a minimum tax. In broad outline, BEAT liability is calculated by taking the US federal income of an in-scope taxpayer and adding back deductions allowed in respect of payments made to related non-US entities ('base erosion payments'). This total amount (referred to as 'modified taxable income') is then multiplied by the applicable BEAT tax rate (currently 10%). BEAT tax liability must be paid to the extent that it is greater than the taxpayer's regular US federal income tax liability.

The BEAT regime would be modified by section 899 in a number of ways, including:

The current regime generally applies only to large corporate groups that meet minimum thresholds: $500m in average annual gross receipts over the last three years and a 3% 'base erosion percentage' (broadly, the ratio of certain deductible payments to foreign related entities over total allowable deductions), which means that relatively few groups are subject to the provisions. Under the House version of the Bill, modified BEAT would apply without these thresholds; the Senate version would apply a 0.5% base erosion percentage test only. Consequently, the BEAT regime would apply to many smaller non-US parented groups and investment vehicles which would otherwise be outside the application of the standard BEAT provisions.
The tax rate applicable under the BEAT provisions would be 12.5% (under the House Bill) or 14% (under the Senate Bill), rather than the standard 10% rate.
The scope of 'base erosion payments' would be expanded to include certain payments made to foreign related parties that are capitalised and not deducted, further increasing the exposure to BEAT.
Certain exemptions from the standard BEAT regime would not apply.

Timing and next steps

The tax measures included in section 899 would generally apply to taxable years that begin after the later of:

90 days (under the House Bill) or one year (under the Senate Bill) following enactment of section 899;
180 days following enactment of the unfair foreign tax; or
the first date an unfair foreign tax of the relevant country begins to apply.

Neither version of the Bill includes 'grandfathering' provisions in respect of existing investments.

Consequently, in relation to the UK (where the UTPR, DST and DPT already apply), the retaliatory tax provisions could apply as early as 1 January 2026 (under the commencement provisions in the House Bill), assuming the Bill is enacted by 2 October 2025, or in 2027 if enactment is after that date.

In advance of the Bill coming into effect, it must, in any event, be approved by both chambers of Congress. The version of the Bill published by the Senate Finance Committee on 16 June 2025 may be further amended before any approval is provided by the Senate. Any differences between the House and Senate versions must then be reconciled to produce a single agreed version, approved by both chambers, before the Bill is signed into law by the President. The current stated aim is for this to take place by 4 July 2025, which is an ambitious deadline.

What this means for private capital professionals

For existing and prospective private capital structures, an assessment should be made as to which, if any, 'unfair foreign tax' exists in jurisdictions relevant to the fund and its holdings. As noted above, under the Senate version of the Bill, the potential consequences of falling within section 899 – increased tax rates and/or exposure to modified BEAT – may differ depending on the type of 'unfair foreign tax' in existence in the relevant country.
Higher US tax rates in respect of US income, and/or increased BEAT exposure and rates, faced by structures involving jurisdictions with 'unfair foreign taxes' will potentially adversely affect the overall tax efficiency of investment structures and strategies.
Along with potentially increased tax liability, private capital structures are likely to have to manage additional compliance requirements. For example, investors may be required to provide information, and potentially representations, regarding their tax residence and ownership, as these concepts are integral to the scope and applicability of section 899.
Fund structures and investors may consider diversification away from US holdings, or investigate the restructuring of funds to fall outside section 899, for example, by restricting the participation of 'applicable persons' in an investment vehicle to a maximum of 50%.
Loan agreements, derivative contracts and certain note offerings commonly include a gross-up for certain withholding taxes. Existing agreements with US borrowers should be reviewed to determine whether gross-up obligations, and potentially termination provisions, may be triggered by the increased withholding taxes provided for in section 899. The allocation of increased withholding tax risks should be considered and provided for in new agreements. If the burden of such risks increasingly shifts to lenders, this may lead to increased borrowing costs.
The Bill is still in draft form and there remain material differences between the provisions of section 899 in the House and Senate versions. It is not yet possible to discern the final form that these provisions will take. Global corporations and banks with US operations continue to lobby against the tax measures, expressing concern that international investment in the US, and additionally US businesses and jobs, will be adversely affected by implementation of section 899. Greater clarity as to the potentially applicable measures will emerge as the Bill proceeds through Congress.
It is possible that negotiations between the US and jurisdictions with 'unfair foreign taxes' could lead to potential removal or amendment of the 'unfair foreign taxes' in question. For example, the exception from the definition of 'unfair foreign taxes' for taxes that do not apply to a US person or a US CFC that is majority owned by US persons (present in both the House and Senate versions of the Bill), means that if a jurisdiction creates an exception from its UTPR for US-parented groups, that tax should no longer fall within the definition of an 'unfair foreign tax'. Delayed implementation of section 899 under the Senate version of the Bill provides further time for such discussions.
In addition to the retaliatory tax measures in the Bill, it is worth private capital professionals noting that both the House and Senate versions of the Bill are currently silent on any reform of the US taxation of carried interest, despite this being a subject of considerable debate in the US. It is still possible, however, that this may feature in a final version of the Bill, particularly if additional sources of revenue are sought to offset wider tax cuts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.